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Hercules Technology Growth Capital Inc.’s (HTGC - Analyst Report) third quarter 2011 distributable net operating income (DNOI) came in at 22 cents per share, in line with the Zacks Consensus Estimate and below the prior-year quarter’s DNOI of 25 cents.
Results in the quarter were positively impacted by a substantial increase in total investment income, offset by higher operating expenses and net realized and unrealized losses. However, Hercules ended the quarter with a strong balance sheet and a high level of liquidity.
Hercules’ total investment income for the reported quarter came in at $18.7 million, up 19.9% from $15.6 million in the prior-year quarter. The increase was attributable to higher average balance of interest earning investments outstanding and accelerated fees related to early payoffs. However, total investment income missed the Zacks Consensus Estimate of $20.0 million.
Quarter in Detail
Total operating expenses (excluding interest expense and loan fees) were $5.8 million, up 15.4% from $5.0 million in the year-ago quarter, reflecting higher employee compensation expenses and other general and administrative expenses.
On a year-over-year basis, interest expense and loan fees surged 72% to $4.3 million. As of September 30, 2011, the weighted average cost of debt, comprising interest and fees, was 6.5% compared with 6.2% as of September 30, 2010.
Net investment income (before investment gains and losses) for the quarter came in at $8.6 million or 20 cents per share compared with $8.1 million or 23 cents in the year-ago quarter. The increase was mainly attributable to a higher average balance of interest earning investments outstanding.
Net realized and unrealized loss was $2.4 million compared with $16.0 million in the year-ago quarter.
The fair value of Hercules’ total investment portfolio was approximately $576.5 million as of September 30, 2011 compared with $475.2 million as of June 30, 2011. During the quarter, the company provided approximately $216.0 million debt funding to new and existing portfolio companies, up 160.2% from about $83.0 million in the prior year quarter.
As of September 30, 2011, Hercules’ net asset value was $9.61 per share, compared with $9.67 per share as of June 30, 2011. Net unrealized depreciation, explains the fall in the quarter.
Additionally, concurrent with the earnings release, Hercules announced the renewal and the addition of a new lender to its Union Bank Facility. Union Bank of California ($30.0 million) and RBC Capital Markets ($25.0 million) has together made commitments of $55.0 million of credit.
Concurrent with the earning release, Hercules declared a quarterly dividend of 22 cents per share. This represents the company’s twenty-fifth consecutive dividend since inception. The dividend will be paid on November 29 to shareholders of record, as of November 14.
Share Repurchase Update
In August, the board of directors approved extending Hercules’ share repurchase program through February 2012. However, during the third quarter of 2011, the company did not repurchase shares of its common stock.
Despite the capital market disruption and sluggish economic recovery, a steady pace of new investments by venture capitalists is expected. This could lead to new investment opportunities, even though we remain cautious about Hercules’ investment and credit management strategies. On the other hand, sluggish economic recovery may lead to increased cost of funding.
Currently, Hercules retains a Zacks #4 Rank, which translates into a short-term Sell rating. However, Hercules’ competitor Main Street Capital Corporation (MAIN - Snapshot Report) retains a Zacks #3 Rank (a short-term Hold rating).